Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: March 2015

NEW$ & VIEW$ (17 MAR. 2015): U.S. weakening, weather or not.

Drop in Manufacturing Takes Shine Off Small Gain in Industrial Production Sign of economic weakness or weather-related upheaval?

Industrial production rose a seasonally adjusted 0.1% from the prior month, the Federal Reserve said Monday. Utility output surged during unusually cold weather, but factory and mining production declined, reflecting weaker demand and cuts in the oil and gas sector.

Capacity utilization, a measure of slack in the industrial sector, slipped two-tenths of a percentage point to 78.9%. (…)

Updated figures showed industrial production was far weaker than previously estimated in January. Production fell 0.3% that month instead of the initially reported gain of 0.2%.

Prior IP data were revised down a cumulative -0.4% MoM. Q1 is on track for zero growth QoQ. The weather is once again conveniently blamed but the fact is that manufacturing production peaked last November and has declined every of the last 3 months at a 2.4% annual rate.

The Empire State PMI New Orders Index fell below zero in March

Home Starts Plunge on Weather While U.S. Building Permits Rise

Housing starts slumped 17 percent, the most since February 2011, to an 897,000 annualized rate after January’s revised 1.08 million pace, the Commerce Department reported Tuesday in Washington. The median estimate of 80 economists surveyed by Bloomberg called for 1.04 million. Ground-breaking in the Northeast plummeted by the most on record.

Starts of single-family properties dropped 14.9 percent to a 593,000 rate in February. Construction of multifamily projects such as condominiums and apartment buildings decreased 20.8 percent to an annual rate of 304,000.

Construction slumped 56.5 percent in the Northeast and 37 percent in the Midwest, which was the most since January 2014. Starts also dropped in the South and West, indicating weather was only partially to blame.

Building permits climbed 3 percent to a 1.09 million annualized pace, the fastest since October, after a 1.06 million rate a month earlier. They were projected at 1.07 million, according to the Bloomberg survey median. The increase was led by a jump in applications for multifamily projects. Permits for single-family dwellings were the lowest since May. (Chart from CalculatedRisk)

Home-Builder Confidence Falls for Third Straight Month A measure of home-builder confidence fell for the third consecutive month in March, a sign the housing sector may struggle to gain traction during the spring buying season.

Builder confidence in the market for new single-family homes declined by two points to a seasonally adjusted level of 53 in March from February’s reading of 55, the National Association of Home Builders said Monday.

“The drop in builder confidence is largely attributable to supply chain issues, such as lot and labor shortages as well as tight underwriting standards,” NAHB Chief Economist David Crowe said in a statement.

Hmmm…Here’s the real reason: traffic has declined below that of 2014 and 2013 (chart from Haver Analytics).

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TOPSY TURVY ECONOMIC SENTIMENTS

Could it be that the Eurozone will be the economic engine of the world? Sarcastic smile 

US and eurozone economic fortunes continue to diverge, with companies in the euro area more optimistic that their counterparts in the US for the first time since 2009. (…)

Global business optimism has waned to a post-crisis low, according to Markit’s Business Outlook Survey. The survey is conducted three times a year and the results reflect expectations for the coming year at some 6,100 companies worldwide.

Pointing up The deterioration in the global outlook was largely driven by optimism among US firms falling to the lowest seen since the survey started in 2009. Hiring intentions also hit a post-crisis low in the US, pointing to weaker employment growth in coming months.

Just as the US is showing signs of slowing, brighter signs of life are appearing in the eurozone. For the first time since the survey began in 2009, eurozone companies are now more positive about the year ahead than their US counterparts.

Across the single currency area as a whole, business optimism has risen to a level just shy of last year’s post-crisis high. Employment intentions have meanwhile hit a post-crisis high in the euro area, contrasting with the new low seen in the US.

(…) the survey is signalling no such turnaround for Japan. A slight improvement in optimism failed to prevent Japanese companies seeing the weakest prospects of all countries monitored amid worries about a lack of demand in the domestic market. (…)

Business expectations across the main emerging markets edged up only slightly from the survey low seen late last year, albeit diverging significantly among the ‘BRICs’. (…) The emerging markets consequently look set to continue to act as a drag on global economic growth in 2015. Recessions look inevitable in Russia and Brazil. Even in China, optimism remains historically weak and there is a growing threat of deflation, with companies expecting prices to fall for the first time in the survey’s history. (…)

Facts about the U.S.:

  • Nominal retail sales have been very weak since and including December.
  • Manufacturing production has declined in each of the last 3 months.
  • Citigroup’s economic surprise index has plunged lately indicating that economists have been much too optimistic in their forecasts.
  • The more timely company surveys have been deteriorating since the fall of 2014 and the deterioration has accelerated in the past 3 months.
  • Capital Goods company surveys, both domestic and export-oriented have dropped in recent months.
  • China-sensitive company surveys also remain weak and seem to be getting weaker.
  • The U. of M. consumer sentiment survey revealed weakening home buying and car purchasing plans
  • Q1’15 EPS estimates (the quarter ends in 2 weeks) have dropped like rocks from +3.8% on December 2014 to –4.9%. While Energy take the brunt of the revisions, other key sectors are being hit: Consumer Staples from +4.2% to –2.0%; Consumer Discretionary from +14.0% to +6.1% and Industrials from +8.6% to +1.9%. Only 4 of the 10 sectors are expected to display positive growth in Q1 (Factset).

For their part, foreign exchange markets certainly don’t seem to think that Europe is so much stronger than the U.S. The DXY jumped 3% last week and 25% in the past 6 months. But equity investors are evidently betting on Draghi. Even though the Euro is sinking like a rock, investors ploughed nearly $36 billion into European stock funds so far this year, exceeding the prior record of $32B set in Q1’14, just before Euro equities corrected 10% through October…Coincidentally, just about the same amount fled U.S. equity funds so far this year. Never mind Russia, Ukraine, China.

Europe’s Deflation Threat Eases

Eurostat on Tuesday said consumer prices in the 28-nation bloc fell 0.2% in February from a year earlier, and confirmed data that showed prices in the eurozone were 0.3% lower. In January, prices fell by 0.5% in the EU as a whole, and by 0.6% in the eurozone.

Twenty EU members experienced an annual decline in consumer prices in February, down from 23 in January.

In another sign that deflationary pressures may be easing, the core rate of inflation in the eurozone picked up to 0.7% from 0.6% in January. Eurostat initially estimated that it was unchanged.

Although car markets across Southwestern Europe gained momentum, the situation in Eastern Europe remained gloomy, where sales fell 2% as the region’s consumer spending continued take a beating due to the crisis in Ukraine.

Auto EU New Car Registrations Rise in February Sales surge 27% in Spain; Italy, the U.K., Portugal and Ireland also log double-digit gains

Eurozone new car registrations, a proxy for car sales, rose 7.3% in February from a year earlier to 924,440 vehicles, according to the European Automobile Manufacturers’ Association.

Since the start of the year, new car sales grew 7% to 1.9 million units, with most major markets contributing to the overall upturn of the European market, the ACEA said on Tuesday.

Sales in Spain increased 27% in February from a year earlier, while Italy and the U.K posted growth of 13% and 12% respectively. Portugal and Ireland posted double-digit growth as well.

In Germany, Europe’s biggest auto market, new car sales increased 6.6% last month, while they grew 4.5% in France.

OIL
China’s Jan-Feb apparent oil demand rises 3% on year to 10.43 mil b/d: Platts estimates

China’s apparent oil demand rose 2.6% over the first two months of this year to 83.92 million mt or an average 10.43 million b/d, Platts estimates showed Monday, March 16, based on recently released government data.

This is the highest rate of growth over the period since the 5.7% recorded in 2012.

Last year, there was a 0.6% year-on-year contraction in China’s apparent oil demand over January to February. (…)

The increase in apparent oil demand in the first two months was mainly driven by higher refinery throughput, which climbed 3.5% year on year to 82.64 million mt, or an average 10.27 million b/d, over January and February, according to preliminary data from the NBS on March 11. (…)

Iran Nuclear Deal Could Open Oil Flood Gates

Iranian exports in recent years have been essentially capped by Western sanctions aimed at pressuring Tehran over its nuclear ambitions. A deal easing those sanctions could eventually translate into half a million barrels or more a day in Iranian crude heading into a currently glutted global market, analysts estimate. (…)

While a deal is far from certain, Iran’s Oil Minister Bijan Zanganeh said Monday that the country could double its exports quickly.

“In case the international sanctions against Iran are lifted, one million barrels a day will be added to the country’s crude-oil production and exports in several months,” Mr. Zanganeh was quoted as saying by his ministry’s news agency Shana. (…)

Iran could perhaps export as much as 800,000 additional barrels a day, within a year “if they had a market to take their crude to,” said Robin Mills, head of consulting at Dubai-based consultancy Manaar Energy. “That’s just turning the fields back on again,” said Mr. Mills. “After that it would be flat or declining until they get some foreign investment.” (…)

Earnings Forecasts Take a Downturn

(…) Equity analysts now expect nearly a 5% drop in year-over-year earnings this quarter for the group, an about-face from a 4% growth rate at the start of the year.

That we knew already. But here’s a gem:

And finance chiefs tempted to give more frequent updates based on current conditions risk seeing the environment shift before the quarter ends.

“It was the one of the worst guidance periods since the great recession,” said Carmine Grigoli, chief investment strategist for Mizuho Securities USA. Punk

I happen to track guidance and trends in guidance and the facts don’t support the statement. As of March 13, we have had 98 pre-announcements including 82 negative ones (83.7%). At the same time last year, 89 of the 106 pre-announcements were negative (84%). Negative pre-announcements were even worse for the Q4’13 earnings season (88%).

To me, the fact that we have had fewer pre-announcements this year is a positive. During the last 2 weeks, there has been only one negative pre-announcement.

NEW$ & VIEW$ (16 MAR. 2015): Retail sales mysteries; Oil

U.S. Producer Price Index Falls Again

The producer-price index for final demand, which measures prices that businesses receive for their goods and services, declined a seasonally adjusted 0.5% last month from January, the Labor Department said Friday. That marked the fourth straight monthly decline.

The so-called core index—excluding the volatile food and energy categories—fell 0.5%.

The stronger U.S. dollar appears to be suppressing inflation. Prices for goods outside of food and energy dipped 0.1% in February, a direct result of lower prices for goods for export, which plunged 0.8%.

On a YoY basis, the PPI-core goods remains up 1.5% down from +2.2% only 4 months ago.

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But the production pipeline suggests lower prices ahead:

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I have recently been posting on the apparent deflation in the U.S. goods market which may explain part of the weakness in retail sales since December.

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As I wrote last Friday:

Sales volumes may be better than suggested by the nominal data. The recent declines could be primarily due to falling prices. Nonfuel import prices fell another 0.3% MoM in February. They have declined every month since September, at an annualized rate of –3.2% during the last 6 months, accelerating to –5.5% in the last 2 months.

Here’s the trend in the CPI for selected consumer goods:

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David Rosenberg is mystified:

(…) The fact that ex-gas spending could decline like this over a period that saw nonfarm payrolls surge by 863,000 is a true mystery. (…)

I would love nothing more than to blame the weakness on the weather. But the problem is that there was no weather impact at all on last Friday’s payroll data, so why would there be in retail sales. (…)

I have been bullish in recent years over the U.S. economic backdrop and remain bullish, but it must be acknowledged that in this business of assessing probabilities and managing risk, that my confidence level in this view has diminished somewhat in recent months.

I sense the consensus view of +2.3% GDP growth for Q1 is going to have to come down roughly a percentage point from here- one reason why my bearishness on bonds, for the time being, has been put on hold- the macro surprise, at least for now, seems to be on the downside.

Two Evercore ISI charts FYI:

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Fingers crossed Another view:

The Billion Prices Project Thinks Inflation May Have Turned a Sharp Corner

The Billion Prices Project, which scrapes the Internet daily to capture changing prices online and has often foreshadowed subsequent changes in official price indexes, shows a sharp turn upward in measures of inflation, albeit from a low starting point.

(…) the Billion Prices Project measure, which is now produced as the State Street PriceStats inflation index, has turned upward sharply in recent weeks. If the turn holds, then inflation could be firming faster than economists realize.

(…) “People have been looking and waiting for some kind of evidence that this lower level of gas prices is somehow supporting consumption,” said Mr. Metcalfe. “People will jump on any evidence that retailers’ pricing power is returning. We have six weeks of evidence that that’s the case and that would point to inflation having bottomed.” (…)

A strong core CPI when import and producer prices are down and retail sales are weak? The February CPI report is due March 24.

OIL
U.S. Energy Producers Prepare for New Oil Wave The ocean of oil from U.S. shale drove crude prices back toward six-year lows Friday, and American energy companies say they are poised to unleash a further flood that would keep prices from returning to lofty levels for a long time.

The International Energy Agency reinforced the prospect of a prolonged slump in energy prices Friday, saying U.S. oil output was surprisingly strong in February and rapidly filling all available storage tanks. The Paris-based energy watchdog said this could lead to another sharp drop in crude prices, which fell by about 50% late last year. (…)

It was only last month that the IEA said a price recovery seemed inevitable because the U.S. production boom was likely to cool. Instead, “U.S. supply so far shows precious little sign of slowing down,” the agency said Friday. “Quite to the contrary, it continues to defy expectations.”

Independent shale-oil producers have slashed their planned 2015 spending on drilling by $50 billion, compared with last year’s, but have promised to increase production by focusing on their best oil fields. Total U.S. crude oil production hit a high of 9.4 million barrels a day in the week ended March 6, according to federal data.

Now many are adopting a new strategy that will allow them to pump even more crude as soon as oil prices begin to rise. They are drilling wells but holding off on hydraulic fracturing, or forcing in water and chemicals to free oil from shale formations. The delay in the start of fracking lets companies store oil in the ground in a way that enables them to tap it unusually quickly if they wish—and flood the market again. (…)

The number of wells in Texas and North Dakota that have been drilled but aren’t yet pumping is at least 3,000, RBC Capital Markets estimates. That oil still in the ground “provides a war chest that could temper fundamental price spikes in the coming year,” RBC analyst Scott Hanold wrote in a Friday note.

This essentially is more U.S. crude in storage, akin to that in the tanks now brimming. The U.S. has 449 million barrels of oil sloshing around in tanks, the highest level on record and almost 70% of capacity, according to the U.S. Energy Information Administration. (…)

Meanwhile from oilprice.com:

  • New data from North Dakota shows that the state’s oil output fell in January to 1.19 million barrels per day, a 3.3% decline from an all-time high the month earlier. The drop off occurred because companies significantly reduced the number of wells completed – well completions dropped from 183 in December down to just 47 in January. Rigs are also down to just 111 for the Bakken, below the estimated 115-130 needed just to keep production flat. Nationwide, a decline in oil output may not be here just yet, but in the Bakken it has already begun.
  • Meanwhile, in the Middle East, Iraq is facing an economic crisis. The combined effect of low oil prices and the security threat presented by the Islamic State have sapped the Iraqi government of much needed revenue. Iraq survives on oil exports, so just like other oil producers it has seen its budget upended because of the price collapse. The situation has become so bad that the Iraqi government reportedly sent letters to the major private oil companies operating in the country, asking them to cut back on their investment. The reason for such a seemingly counterproductive request is because the government can no longer reimburse the companies for the costs of developing oil fields. As a result, several major oil companies operating in Iraq have proposed significant spending reductions and project delays. (…) For now, the largest oil fields in Iraq’s south are operating normally, but if investment is scaled back, Iraq’s ambitious plans to ramp up production over the long-term will take a hit. Consequently, the projections for future Iraqi oil production will likely need to be revised in the months ahead. (more on this in “Buy Low” Time For Oil)
  • The oil industry is stepping up its campaign to convince the federal government to allow crude oil to be exported from American shores. The top executive of a lobbying group for oil exports met with a senior White House official on March 11. But that wasn’t all. The CEOs of Marathon Oil (NYSE: MRO),Chesapeake Energy (NYSE: CHK), and Occidental Petroleum (NYSE: OXY), also met with top government officials from both the executive and legislative branches. Changing the export ban is a top policy goal for the industry, which would allow producers to reach the broader global market, provide a lift to domestic prices and incentivize more drilling. The Obama administration has cracked open the door to exports by granting waivers for the export of ultralight condensate, oil that has been lightly processed. But producers want a blanket repeal of the export ban. The new makeup of the U.S. Congress is friendlier to the industry than it has been in years, and powerful members in the Senate are gearing up for a legislative campaign to rewrite energy laws this year.
  • The WSJ editorial:

(…) That [shale oil] production is now under pressure from lower prices, but the damage could be reduced if U.S. producers were able to export more of their product to meet demand in the global market. American frackers produce the light, sweet crude known as West Texas Intermediate (WTI), and world refineries are eager for more.

But U.S. producers can’t export their oil, and U.S. refineries are mainly built to process heavier oil imported from Mexico, Venezuela and Canada. This refining mismatch means that U.S. oil is piling up in storage or being sold at a discount. WTI now trades 20% below the world market price, which means additional pressure on U.S. producers to stop drilling.

That plays into the hands of Russia and Saudi Arabia, which are only too happy to see U.S. production fall so global prices can climb again. (…)

The political fear is that lifting the ban would increase U.S. gasoline prices, but the opposite is true. U.S. pump prices are mainly tied to the price of Brent crude, which is freely traded on the world market and is higher than it might otherwise be because of the ban on U.S. exports.

If U.S. producers were allowed to compete globally, prices of Brent and WTI would converge over time, and U.S. gasoline prices would come down, all other things being equal. As former Obama White House economic aide Larry Summers explained at the Brookings Institution last summer, “permitting the export of oil will actually reduce the price of gasoline.” (…)

All of which makes lifting the export ban an easy call. It would help U.S. producers adjust to lower prices while creating an incentive to maintain more American production. The result would be less reliance on foreign oil, while reducing bankruptcies in the oil patch if global prices stay low.

Key Republicans and the White House understand this, but they’re moving slowly for their own reasons. The GOP fears a populist backlash pushed by Democrats like Chuck Schumer and Ed Markey playing the phony nationalism card.

As for President Obama, he could do more to lift export curbs through executive action. Yet this is one area in which he refuses to act on his own. The longer he waits, the more we suspect that he may want less U.S. oil production because of his hostility to carbon fuels in the name of limiting climate change. Whether he goes along or not, Republicans should start to explain to the public that the oil export ban is harming U.S. workers, producers and consumers.

Stronger-than-expected oil demand growth at the end of last year in the US on the back of rising economic activity saw year-on-year global demand growth reach 870,000 b/d in the fourth quarter, the IEA said, some 200,000 b/d higher than previously estimated.

World oil demand is now forecast to grow by almost 1 million b/d this year or 1.1%, to 93.5 million b/d, the IEA said.

Preliminary statistics for January show a second consecutive month of year-on-year demand growth in both the US and Europe, the IEA said, noting that the result is a “two-month pattern not having previously been seen for eleven- and sixteen-months, respectively.”

“Preliminary estimates of February gasoline demand imply this positive US growth trend being drawn out to at least five months, a feat not previously achieved in roughly two years,” the IEA said.

Chinese oil demand remains “somewhat subdued”, however, amid macroeconomic weakness despite numerous recent government price cuts, the IEA said.

“Early indicators of 2015 Chinese demand imply a softening in momentum, with growth of approximately 2.7% forecast for the year as a whole, up to an average of approximately 10.7 million b/d,” it said.

As a result of the slightly higher global demand forecast, the IEA said it has raised its estimate for the call on OPEC’s crude by 100,000 b/d this year to 29.5 million b/d.

The revised outlook has seen the average “call” on OPEC’s crude for the first half of 2015 rise to 30.3 million b/d, above the group’s official output ceiling.

On stocks, the IEA said OECD commercial inventories rose by a weaker-than-average 23.1 million barrels in January to stand at 2.73 billion barrels by the end of the month.

As a result, the stock surplus to seasonal levels fell back to 60.3 million barrels from 75.1 million barrels at end-December, the IEA said.

US crude stocks built by over 1 million b/d during January and February, the IEA noted, with much of this increase attributed to a seasonal drop in US refinery throughputs.

Globally, preliminary data show OECD stocks drew by a “weak” 8.8 million barrels in February after US crude stock build mitigate heavy stocks drawdowns in refined products due to cold weather.

  • SUV Sales Plow Through February Poor weather modestly dented the pace of U.S. auto sales in February, but did little to stem America’s increasing thirst for pricey trucks and SUVs.

In February, sales of light trucks—buoyed by low fuel prices—represented 54.4% of the market, a level the segment hasn’t reached on an annual basis since 2005.

Even in the Province of Quebec where high taxes are keeping gasoline prices relatively high, sales of SUVs reached a record in December when, for the first time in history, more SUVs than cars were pruchased.

(…) In March 2014, the Energy Department announced it was selling five million barrels of sour crude oil in what the government described then as a “test sale.” Friday’s announcement to buy back that amount of oil is required by law within one year, according to Energy Department spokeswoman Lindsey Geisler.

The Energy Department will be able to buy five million barrels of light, sweet oil at roughly half the price they earned for the same amount of sour crude last year. (…)

The reserve has the capacity to hold about 727 million barrels of oil in underground salt caverns along the Gulf Coast. In a notice posted online, the government said that one of the reserve sites in Freeport, Texas, would be receiving the oil and could begin taking deliveries as early as May. (…)

China Plans More Action to Spur Growth China is signaling that more measures are in the works to regain economic momentum and overcome weak demand from businesses and consumers.

Wrapping up the 11-day session at a news conference on Sunday, Premier Li Keqiang said that while the economy faced downward pressure, the government has room to step in and has “more tools in our toolbox” should growth flag and affect employment.